29-01-2019 1 SPECIAL COMMITTEE ON FINANCIAL CRIMES, TAX EVASION AND TAX AVOIDANCE (TAX3) TUESDAY 29 JANUARY 2019 * * * PUBLIC HEARING “MONEY LAUNDERING CASES INVOLVING RUSSIAN INDIVIDUALS AND THEIR EFFECT ON THE EU” * * * Panel I: Effects in the EU of the money laundering cases involving Russian linkages Anders Åslund, Senior Fellow, Atlantic Council; Adjunct Professor, Georgetown University Joshua Kirschenbaum, Senior fellow at German Marshall Fund’s Alliance for Securing Democracy Richard Brooks, Financial investigative journalist for The Guardian and Private Eye magazine Panel II: The Magnitsky case Bill Browder, CEO and co-founder of Hermitage Capital Management Günter Schirmer, Head of the Secretariat of the Committee on Legal Affairs and Human Rights of the Parliamentary Assembly of the Council of Europe 2 29-01-2019 1-002-0000 IN THE CHAIR: PETR JEŽEK Chair of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (The meeting opened at 14.38) Panel I: Effects in the EU of money laundering cases involving Russian linkages 1-004-0000 Chair. – Good afternoon dear colleagues, dear guests, Ladies and Gentlemen. Let us start the public hearing of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) on money-laundering cases involving Russian individuals and their effects on the EU. We will deal with the issue in two panels. On the first panel we are going to discuss the effects on the EU of money-laundering cases involving Russian linkages. Let me now introduce the speakers for the first panel. We welcome Mr Anders Åslund, who is a Senior Fellow at the Atlantic Council and Adjunct Professor, Georgetown University. He will speak about Russian money laundering into the European Union and how it has become a major national security threat to EU Member States. Our second speaker is Mr Joshua Kirschenbaum. Welcome. He is a Senior Fellow at the German Marshall Fund’s Alliance for Securing Democracy, focusing on illicit finance. He is also the co-author of a paper proposing a better European Union architecture to fight money laundering, together with Nicolas Veron. A delegation of the TAX3 Committee met Mr Kirschenbaum in Washington DC last July, and it was a very valuable meeting for us. Finally I’d like to welcome Mr Richard Brooks. He is a journalist at Private Eye and The Guardian who has investigated several cases of money laundering from Russia. Each speaker will have a slot of a maximum of seven minutes for their introductory remarks. I’d like to ask Mr Åslund to start. The floor is yours. 1-005-0000 Anders Åslund, Senior Fellow, Atlantic Council; Adjunct Professor, Georgetown University. – Chair, I would like to say how much I appreciate this opportunity to speak to you here in the European Parliament on this important topic. In my view, Russian money laundering into the European Union amounts to a major national security threat to all EU member countries. We need to understand and take measures against this curse. The best cure is financial transparency. Fortunately, the European Union has taken the right steps with its adoption of the Fifth EU Anti-Money Laundering Directive in June 2018. Its key provision requires all measures to ensure information on the beneficial ownership of all legal entities and to ensure this is accessible not only to the competent authorities but also to any member of the general public. It is vital that this becomes fully implemented. My starting point is the nature of the current Russian regime. I’ve devoted the last four decades to studying the Soviet, and lately the Russian and Ukrainian, economies. Under President Vladimir Putin, Russia has developed not only into an authoritarian state, but an authoritarian kleptocracy. Putin’s regime amounts to a merger of two things: security 29-01-2019 3 police and organised crime. So it is not a state that is functioning in an ordinary fashion but a state that is functioning in order to enrich and empower the rulers. In my forthcoming book, Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy that Yale University Press will publish in May, I describe Putin’s regime as four circles of power. Three of them are domestic: the state, the state companies, and Putin’s cronies that tap the state and its enterprises on money. All these bodies are controlled by men completely loyal to Putin – and closeness and loyalty to Putin are more important here than belonging to the KGB. But the fourth circle is to be found abroad. It is the Anglo-American offshore, primarily the United States and the United Kingdom, where the vast fortunes are being hidden. This is the crucial weakness of Putin’s regime because this is beyond his control. The dimensions of his kleptocracy are enormous. Since 2004, Putin and his closest friends have withdrawn from Gazprom alone USD 10-15 billion for their personal gain. This is not for the state; this is for essentially five people sharing this money. In total perhaps it has been USD 15-25 billion that they have taken out of the state and state companies since 2006. The irony is that they can’t keep this money at home because Russia does not have rule of law and therefore no secure property rights, therefore all civil rulers need to take it out. The people I’m primarily thinking of here are well documented, Gennady Timchenko, Arkady Rotenberg, his brother Boris Rotenberg, and Yuri Kovalchuk, all old friends of Putin from St Petersburg. All four have been sanctioned by the United States, but the EU has only sanctioned Arkady Rotenberg and Yuri Kovalchuk because Timchenko and Boris Rotenberg are Finnish citizens and thus EU citizens. Some big Russian businessmen have chosen to cooperate very closely with the Kremlin and provide a multitude of services to the Kremlin. The most obvious ones are Roman Abramovich, Oleg Deripaska, Alisher Usmanov and Suleyman Kerimov. Of these four top Kremlin oligarchs, only Deripaska and Kerimov have been sanctioned by the United States and none by the EU. How large are these sums? Since 1990 Russia has had steady and large capital flight. The net outflows amount to about USD 800 billion and this is probably the amount that is hidden by Russian private people abroad – an enormous amount of money. The way that money is going out of Russia has traditionally been through Cyprus, because of the double taxation agreement the Soviet Union and Cyprus of 1982, and then the money tends to move on to the British Virgin Islands, to the Cayman Islands and then to Britain and the United States, particularly to Wilmington, Delaware and then on. Where does it end up? To considerable extent in real estate. Other possibilities are private equity funds, hedge funds and US Treasuries, while the banking system and ordinary stock exchanges are well regulated and policed. The conclusion is that all the EU countries should proceed with personal sanctions against Putin’s cronies, oligarchs serving the Kremlin abroad, friends holding funds for Putin, and relatives holding fortunes for Putin. Putin has clearly shown that he reacts most against sanctions of a personal nature. That’s why the Magnitsky Act has been so important, along with the personal sanctions of his closest friends. This leads to the recommendation that EU countries adopt the Magnitsky Act and apply it with force. The other line of action, as I mentioned in the introduction, is to pursue transparency and do that in two regards. First, all the EU countries should demand that the ultimate beneficiary 4 29-01-2019 ownership of all assets within the European Union should be made public in line with the Fifth Anti-Money Laundering Directive. Second, all public officials should be compelled to declare assets, incomes and sources of incomes on an annual basis, and that these should be made public, as has been the case in the Nordic countries since the 18th century, because many former politicians, former top officials and businessmen are now being given – quite legally – board jobs and consultancies by the big Russian companies. Gerhard Schröder stands out here as the outstanding example of how that can be done, and of course such people tend then to become completely loyal. This needs to be exposed. (Applause) 1-006-0000 Chair. – Thank you Professor. I think your introduction has already demonstrated that today we are addressing a topic of huge global importance. Now Mr Kirschenbaum please. 1-007-0000 Joshua Kirschenbaum, senior fellow at German Marshall Fund’s Alliance for Securing Democracy. – Mr Chairman and esteemed Members, thank you for the invitation to this important hearing. I am honoured to appear before your committee today. Illicit financial activity emanating from Russia and the Commonwealth of Independent States (CIS) is an issue that deserves to be high on the bilateral American-European agenda. Recent years have witnessed a profusion of money-laundering scandals at European banks. The common themes have been billions of dollars laundered through one single institution in a given case, frequently with ties to Russia and the CIS; the imposition of lacklustre fines; and a relative absence of criminal prosecutions. Even when such schemes may have the immediate goal of facilitating corruption or criminality ‘over there’ – such as in Russia – toleration of such activity inside the EU creates risks here at home. Professional facilitation networks to control opaque financial channels that may be used for relatively benign purposes such as capital flight will happily offer their services to actors engaged in political interference in European Union Member States. Allowing banks and others to develop a business dependent on opaque or illicit money from the CIS also risks establishing a domestic constituency here in an EU Member State that is likely to be amenable to Russian political or economic influence.